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Tough budget but no surplus yet

Jason Cadden

Treasurer Joe Hockey's first budget may be the first in a quite a few years not to include a surplus forecast.

The median forecast for May 13 budget is an underlying cash deficit of $30 billion for the 2014/15 financial year.

And economists believe there won't be a surplus in sight for several years.

An AAP survey of 11 economists found that most believe that the government won't have a surplus until the 2020s.

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However, RBC Capital Markets senior economist Su-Lin Ong said this year's budget will be the start of a trend of smaller and smaller deficits.

"Despite an enviable net debt position and modest deficit by international standards, the structural deterioration in the budgetary position has become more pressing," she said.

"A return to surplus over the forward estimates is unlikely, but progress should be expected."

AMP chief economist Shane Oliver said spending growth is the reason why the budget has failed to get back to surplus.

"If the budget problem is excessive growth in spending that will really become apparent in four years' time, then a "temporary" tax increase is not the best way to address it," he said.

"The impact of it would be that it would constrain the recovery in growth, back towards trend."

The previous Labor government on a few occasions tried to turn a deficit worth tens of billions into a wafer thin surplus.

However six months before his last budget, former Treasurer Wayne Swan admitted that a surplus was unlikely after it was discovered company tax revenues were falling because of lower commodity prices and the persistently high Australian dollar.

The median estimate for the budget's economic growth forecast for 2014/15 is 2.75 per cent, according to AAP's survey, down from the three per cent growth forecast in last year's budget.

The treasurer has been preparing Australians for a tough budget, with speculation he will announce a temporary debt levy for high income earners.

Many economists say that could dampen economic growth and in turn will reduce tax revenues.

Commonwealth Bank chief economist Michael Blythe agrees that something needs to be done to address the persistent budget deficits but care needs to be taken not to hurt economic growth.

"Any non-trivial increase in income tax rates at a time when wages growth is weak and the economy is stuck in a sub trend groove may have a negative impact on consumer spending," he said.

"The limited ability to influence revenues and the probability of tax cuts means the focus must be on the expenditure side of the budget."

Possible spending cuts were flagged in the recently released National Commission of Audit report, which contained 86 recommendations aimed at saving the budget up to $70 billion annually.

The mooted spending cuts focused on health, the ageing and education but the government says it won't necessarily implement all the recommendations and has already rejected a few.